On January 31 at 11 pm (the Brexit day), the UK officially left the EU. Currently, the UK is in a transition period, where it would negotiate its future relationship with the EU. This so-called transition period is scheduled to last until the end of 2020.
It is largely expected that Brexit would have an impact on the currency market, but how much and what is something hard to predict. The uncertainty grows darker if we consider the present turmoil in the global economic markets triggered by the coronavirus pandemic.
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However, things are starting to get somewhat clear as we move closer to the year-end (or the deadline for the transition period approaches) and the global markets get over with coronavirus-induced pandemic.
Outlook For Pound Improving
We can say that the outlook for pound is improving on the back of supportive Bank of England (BoE) policies and the likelihood of Brexit trade deal later this year.
The Bank of England’s latest policy update (on August 6) confirmed that it is in no hurry to slash the interest to 0% or less. Expectations of a rate cut proved to be a headwind for the pound sometime back. Moreover, the recent recovery in the global financial markets has also improved sentiments towards the pound.
The pound now continues to trade over the 1.30 level against the dollar and 1.10 level against the euro. This is a significant improvement from the 1.22 GBP/USD and 1.0913 GBP/EUR lows seen a couple of months back. Moreover, the pound continues to gain against the dollar, and on Thursday hit a five-month peak. Dollars to Pounds (USDGBP) rate equaled 0.766 on August 13 compared to about 0.80 in late June.
This rise in the sterling, along with the above discussed factors, is also driven by a weakening dollar and growing expectations of a post-Brexit trade deal before the end of the year.
Going ahead (for the next week or so), the support for the currency is expected to extend. This is because there are not likely to be any major Brexit-related news, nor there be any new policy guidance from the BoE.
After that, October is seen as a key month for pound. This is when the final details of a deal are expected to be agreed. It is believed that a breakthrough on Brexit trade negotiations (a likely scenario) could prove an upside surprise for pound.
Until the deal (or we can say in September), the element of uncertainty over the negotiations would likely keep the pound range bound. The announcement of the deal (and its tilt towards the UK) will then determine the price movement.
Pound After Brexit
Much of how pound fares after 2020 would depend upon the success of the post-Brexit trade deal for the UK and the country’s overall economic growth. A deal favorable for the UK and the one that opens the door for new economic partnerships would boost the pound. Similar sentiments were echoed by pound after the announcement of the Brexit transition deal.
Recently, Morgan Stanley and Goldman Sachs reduced negative outlook on the pound over supportive BoE policies and the increasing likelihood of an autumn Brexit trade deal. Additionally, Morgan Stanley believes a "mixed deal" as the most likely scenario.
A "mixed deal," as per Morgan Stanley means the UK “out of the single market”, “close alignment on trade in goods”, and “limited agreement on financial services provision.”
The pound has witnessed several fundamental transformations – both highs and lows - over the past few years owing to the Brexit uncertainty. Though the Brexit saga is still not over, the uncertainty level has reduced drastically.
Now, the overall macro environment seems supportive for pound, encouraging currency market participants to adopt an optimistic tone towards it. But, there is no denying that in a post-Brexit era, the UK’s economic growth and the Bank of England’s (BOE) monetary policy decisions will eventually decide the pound’s way forward, which as of now looks positive.